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Long-run equity performance of firms that restate financial statements

Gisung Moon, Hongbok Lee and Doug Waggle

Managerial Finance, 2019, vol. 46, issue 1, 92-108

Abstract: Purpose - The authors investigate how the stock market reacts to financial restatements using the restatements data from the United States Government Accountability Office (GAO-06-678). In particular, the purpose of this paper is to examine the long-run equity performance of the restating firms, for holding periods of one to five years after the announcements of restatements. Design/methodology/approach - This paper measures the long-run stock performance of restating firms with the buy-and-hold abnormal returns and time-series regression analyses based on Fama–French’s (1993) three-factor model and Carhart’s (1997) four-factor model. Findings - The authors find that restating firms significantly underperform in the long run compared with their peers matched by industry, size and book-to-market. Restating firms’ underperformance is confirmed with time-series regression analyses based on Fama–French’s (1993) three-factor model and Carhart’s (1997) four-factor model. Further, the authors find the negative long-run abnormal performance of restating firms is primarily driven by large firms. The authors also report that self-prompted restatements and improper revenue accounting-triggered restatements result in worse long-run abnormal performance. Originality/value - This paper is the first paper that thoroughly investigates the long-run stock returns of the firms that restate financial statements by fully considering the size effect.

Keywords: Financial statements; Restatements; Long-run performance; Buy-and-hold abnormal returns; Three-factor model; Four-factor model; G10; G11 (search for similar items in EconPapers)
Date: 2019
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